Still early days for ETFs

THERE is no question that these are still early days for the growth of the Exchange Traded Fund (ETF) market in Australia.

Although the first ETF was launched in Australia nine years ago, the products had a relatively subdued beginning in this country.

Globally, ETFs have been available to investors much longer – the world’s first popular ETF was launched two decades ago in Canada, as discussed by Smart Investing last week. And ETFs have truly grabbed the attention of investors in the United States and Europe.

The total market capitalisation of ETFs listed in Australia is rapidly increasing in percentage terms, albeit from a low base.

The latest Listed Managed Investments Monthly Update, recently published by the ASX, shows that the total market capitalisation of ETFs listed in Australia reached $3.4 billion by April 30 – up 134 per cent in the previous 12 months.

One of the interesting characteristics of the Australian ETF market is that investor support remained strong through the bear market and global financial crisis. This is clear by looking back over past copies of the Listed Managed Investments Monthly Update.

For instance between March 2008 and March 2009 (the month when the Australian sharemarket hit its bear market low and began to strongly rebound), the total market capitalisation of ETFs in Australia actually rose by a defiant 31 per cent – a period when the market was going backwards.

Whenever the market is experiencing a difficult period, the logic of having a widely diversified, low cost and tax-efficient portfolio would be truly reinforced to many investors.

Again as recently noted by Smart Investing, one of the next major drivers in the popularity of ETFs in Australia could be the federal Government’s proposal to bar financial advisers from charging commissions to retail investors.

The ban, planned from July 2012, would mean that many more financial planners are likely to offer a wider range of products including more that currently do not pay commissions. ETFs are no-commission products.

Although the intended change is two years away, planners will be adjusting their product offerings well before the deadline date.

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Robin Bowerman, Vanguard Investments Australia's Head of Retail, has more than two decades of experience in the finance industry as a writer, commentator and editor.